The 30-share index resumed on a positive note and touched a high of 19,981.57 on an initial rally in Asian stocks. Profit-booking in select counters led the index lower to settle at 19,727.27, a fall of 166.58 points or 0.84 per cent -- the lowest level since closing at 19,270.06 on September 6.

The Sensex lost 536.44 points, or 2.65 per cent over the past five trading sessions, the first weekly drop in five.

The 50-share CNX Nifty index on the NSE dropped 49.05 points, or 0.83 per cent, to 5,833.20. The SX40 index on the MCX Stock Exchange closed at 11,740.84, down 38.32 points.

Raghuram Rajan, who was in Frankfurt to receive the Deutsche Bank prize for Financial Economics 2013, said there is still some inflation in India after stripping out the effects of food and energy and other factors are also driving prices higher.

Asked about the RBI's policy stance, Raghuram Rajan said, "At this point we are neutral, we will see how things develop."

The Raghuram Rajan raised the repo rate last week, saying it was needed to bring down inflation to more tolerable levels.

"Markets were negatively surprised last week by the 25 bps repo rate hike by the RBI," said Dipen Shah, head of the Private Client Group Research at Kotak Securities. "Consequently, most of the banking and other interest rate sensitive stocks under-performed for the week."

Foreign institutional investors bought a net Rs 172.15 crore of shares yesterday, according to provisional data from the stock exchanges.

In other Asian markets, key indices in China, Hong Kong, Singapore, South Korea and Taiwan closed higher while Japan closed lower. US jobless claims unexpectedly fell and Japan's inflation accelerated to the fastest pace since 2008. European markets were lower in early trade as investors awaited a report on economic confidence in the euro area. Key indices in the UK, France and Germany were down.